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Week In Review

FOMC Meeting

As expected, the Federal Reserve Open Market Committee (FOMC) announced its decision to increase the federal funds rate to the target range of 2.0% to 2.25%. According to the Fed statement, the labor market continued to strengthen and economic activity has been “rising at a strong rate.” The committee noted that both household spending and business investment have “grown strongly” and unemployment has stayed low. The committee also stated that overall inflation remains near its 2% target and that indicators of longer-term inflation expectations are little changed.

Our Take

Unemployment is low, growth is accelerating and inflation is near its 2% target, and nothing in the statement hinted that Fed officials plan to deviate from the stated gradual path of rate increases. The Fed remains on track for another rate hike by the end of the year.

Italy

Salvini and DeMaio overcame opposition from Finance Minister Tria and President Matarella to have Italy’s proposed 2019 budget include a projected deficit of 2.4% of GDP. This deficit level is above the 1.5-2% target that the EU wants, and is driven by the tax cuts and universal income that The League and Five Star promised in their campaigns. The EU Economic Affairs Commissioner stated that the budget is risky given Italy’s debt levels and is not in line with EU fiscal rules. Spreads on Italian government bonds widened sharply relative to Bunds.

Our Take

The Italian populist leaders are showing that they are willing to confront the EU over fiscal policy in order to deliver on their campaign promises. While the EU and the ECB seem unlikely to impose any direct penalty on Italy, these two institutions are unlikely to intervene to shield the Italian economy and financial system from any adverse market reactions to Italian fiscal policy.

U.S. Consumer

U.S. consumer spending and incomes rose 0.3% from the prior month. This is a slowdown in the rate of consumption growth and less than expected for wage growth. Consumer inflation rose just above 2%, and the core inflation number was right at the Fed’s 2% goal.

Our Take

Steady growth in incomes and spending plus a lack of acceleration in inflation indicate that the economy is continuing to grow at a moderate pace in the third quarter, and that the Fed is unlikely to alter course in the near future. A key issue to watch here will be how these numbers respond to increasing tariffs and trade restrictions.

Municipals

Connecticut officials have projected a budget surplus of almost $170 million, which is up $31 million from last month’s estimate. Higher tax collections and lower spending have led to the surplus. In addition to the surplus, the state has $1.2 billion in emergency reserves. Governor Daniel Malloy, who leaves office after two terms, stated that “the state is in far better shape today than when I came into office.”

Our Take

Connecticut has taken steps to improve its fiscal health. However, as Governor Daniel Malloy leaves office, the two candidates vying for his job will have a lot of work to do in order to continue the progress. Connecticut has struggled with underfunded pensions and budget deficits for years. Many will be watching the race for governor closely this fall to see how each candidate will address the state’s finances.